Each year about 40 percent of all home sales involve first-time buyers, which means that 60 percent of all transactions involve people who have bought and financed before. Surely buyers, sellers, and brokers must wonder why it is that with each home sale buyers must be repeatedly qualified and why debt from one home cannot be transported to another.

The idea of "portable" mortgages has been around for at least a decade, but it is a concept which has never taken hold -- despite the fact that a truly portable mortgage would speed realty transactions and lower closing costs.

To see how a portable mortgage would work, consider our favorite couple, Bob and Brenda Buyer. The Buyers own a home worth $200,000 and have a current mortgage balance of $150,000. They want to purchase a $300,000 home. If they can move their debt and buy with 80 percent financing, they can purchase their replacement home by obtaining a $90,000 second trust. ($150,000 + $90,000 = $240,000 or 80 percent of $300,000).

This transaction requires several assumptions to work:

• An appraisal must confirm that the replacement home must be worth as much or more than the original property.

• The borrower must have an excellent credit history-- say no late or missed mortgage payments for at least two years.

• What was a first mortgage on the old home must remain a first mortgage on the new property -- a core concern to lenders because in the event of foreclosure a first loan will have to be repaid in full before any other mortgage debt can be satisfied.

• One mortgage can be secured by two properties. For instance, if a loan is used to buy a replacement home but the original property is unsold, the loan will be secured by two properties.

• The interest rate for the combined first and second mortgage are competitive with the rate one would pay for a single loan.

• The monthly cost for the first and second mortgage is not more than the payment required for a single loan.

• The second loan is not a short-term balloon note. Instead, it is a loan with a term of at least 15 years.

With a portable mortgage, there are no points, application fees, processing delays, qualification hurdles, or loan origination expenses. Good debt is merely moved. Buyers save dollars and sellers will have cause to favor purchasers with portable mortgages because loan hassles can be avoided.

So why aren't lenders jumping at the opportunity to create a new loan product? One reason is that what borrowers call "fees" lenders call "income." Portable financing challenges the economics which lenders use today.

That said, the loan business is a Darwinian contest where only the strong survive. Lenders are always looking for a marketplace edge, and a true portable loan product would no doubt interest the three of every five buyers who now have a loan -- statistics lenders cannot ignore.

Published: July 7, 1998

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